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Snap needs to prove it’s still growing despite Facebook’s repeated copying

Here’s what to watch for when Snap reports Q2 earnings on Thursday.

Snapchat CEO Evan Spiegel
Snap CEO Evan Spiegel
Matrix / Getty

Take two.

Snap is set to report its highly anticipated Q2 earnings on Thursday, its second earnings report since going public in early March, and, more importantly, a chance to turn things around after a very disappointing inaugural earnings report in May.

The popular messaging app made less and spent a lot more than Wall Street was expecting, and the company’s stock has been bleeding ever since. Snap stock is down more than 43 percent since it reported its Q1 earnings.

But Wall Street — as we saw with Twitter earlier this year — can be very forgiving. Advertisers (and investors) are still looking for legitimate mobile alternatives to Facebook and Google, and it’s possible Snap could still become an important player in that world.

The company will have to do a few obvious things on Thursday when it reports earnings in order to reverse course.

  • Snap needs to show its user base is growing despite repeated efforts by Facebook and Instagram to copy all of its best features. Snap added nine million new users last quarter, and RBC Capital’s Mark Mahaney expects the company to add just seven million more in Q2. It’s clear Snap won’t grow like Facebook, but it also can’t afford to flatline the way Twitter has.
  • One key metric for measuring Snap’s business growth: ARPU, or the average money generated from each user. If that number keeps climbing, Snap’s business should grow even if its user base doesn’t. It’ll be an important metric to watch Thursday.
  • Snap’s expenses should return to “normal.” The company surprised a lot people last quarter with a massive net loss bogged down by a lot of vested stock awards, including a big one for CEO Evan Spiegel. No one expects Snap to be profitable this quarter, but returning the company to a more manageable net loss would be helpful, even if only for peace of mind. Snap is still on the hook for a number of large cloud services deals that will become more expensive over the next couple of years.
  • Spiegel needs to sell Snap’s story instead of stoically remaining so self contained, and show he’s taking Facebook and Instagram seriously. On the first earnings call, Spiegel dismissed Facebook’s cloning efforts, compared the social giant to “Yahoo” and declined to share any real vision for where Snap was going because he likes to surprise people. It was a performance that rubbed some investors the wrong way.

Whatever happens, the focus on Snap won’t end Thursday. Current employees have not yet been able to sell stock since the IPO, and should be able to start selling for the first time next Monday. It’s possible a good earnings report might encourage some employees to hang on to their shares a little bit longer.

A bad earnings report could, ironically, do the same. Snap’s stock is already near an all-time low, and nobody likes to sell at the bottom.

Snap reports Q2 earnings after markets close on Thursday. Wall Street is expecting a net loss of 14 cents a share on revenue of $189 million.

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